Development pipeline begins to slow in U.S
Development pipeline begins to slow in U.S
15 AUGUST 2008 5:27 PM

U.S. hotel development slowed in the second quarter of 2008 according to STR. Economic worries and credit challenges reduced the amount of projects breaking ground.

HENDERSONVILLE, Tenn.—After five consecutive quarters of growth, the U.S. lodging active pipeline showed declines in both number of projects and rooms in the second quarter of 2008, according to the July STR/TWR/Dodge Construction Pipeline.

The number of projects in the active pipeline fell from 5,992 in the first quarter of 2008 to 5,898 in the second quarter, while the number of rooms dropped from 665,250 in the first quarter of 2008 to 664,327 in the second quarter. In the same period, the number of projects in the planning phase dropped by 66, though the number of rooms rose by 6,479.

“The pipeline is following the U.S. economy,” said Marcella Quaglia, supervisor of Smith Travel Research’s pipeline department.

Despite the relative drop, the pipeline has still seen an 18.1-percent total increase in rooms from July 2007 to July 2008.

Bill Fortier Marcella Quaglia
Bill Fortier Marcella Quaglia

“Projects that have started construction are going to be opening, but that means there’s going to be more supply (growth) than demand (growth) probably until next summer,” Quaglia said, adding that projects in the pre-planning phase are going to be most affected by the economy crunch.

Bill Fortier, senior VP of development, Americas for Hilton Hotels Corporation, said pre-planning is most stagnate for projects that cost more than US$20 million to finance.

“Credit issues seem to be affecting hotels or portfolio hotels where an owner is trying to get a loan north of (US)$20 million,” he said. “That area of the economy and for the hotel business has been hurt. We’re not doing a lot of new deals ground up that require that kind of money.”

Hilton is, however, pursuing a number of projects in the midscale-without-F&B and upscale chain scales, where ties to regional banks have made financing much more accessible, Fortier said.

“Hampton, Homewood and Hilton Garden Inns are working with local and regional banks—folks they’ve been working with through this cycle and last cycle,” he said. “They’re able to make those loans still. That’s helped our pipeline quite a bit.”

Hilton brands comprise 21.3 percent of the total projects in the midscale without F&B pipeline, and 25.6 percent of the total projects in the upscale pipeline, according to the STR/TWR/Dodge Construction Pipeline.

David Pepper, senior VP of franchise development and president of the upscale and extended stay brands at Choice Hotels International, shared similar findings.

“We haven’t seen a huge drop-off in midscale without F&B because they are hotels that are (US)$5 or (US)$10 million that can still get financed with a local bank,” he said, adding that projects of US$15 million and above are much harder to finance with national banks.

Choice brands account for 447 projects in the total midscale without F&B pipeline, according to the pipeline report.

Quaglia said midscale without F&B projects are an attractive option for consumers as well.

“A lot of hotel companies are doing these midscale without F&B brands because they tend to go the economical traveler,” she said. “Even a lot of business people will use them because they’re offering a lot of amenities that some of the upper upscale and luxury don’t offer, like free Wi-Fi and breakfast.”

Said Pepper: “It’s an area that still has held up in these upturns and downturns. You’re going to still benefit from people trading down going forward. People are still interested in midscales.”

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